Procedures for Export and Import and Customs Clearance

1. Procedures for Export and Import

An enterprise permitted under the Foreign Investment Law has to be registered as
exporter importer upon business recuirement. with the Export Import Registration Office,
Directorate of Trade.
The Registration of Exporters/Importers
The following persons or enterprises can be registered at the Ministry of Trade as
exporters/importers:

• A citizen or an associate citizen or a naturalized citizen of the Union of Myanmar

• Partnership firms
• Limited companies or joint venture corporations, formed under the Myanmar
Companies Act 1958 or Special Company Act 1950
• Co-operative societies, registered under the Union of Myanmar Co-operative
Law, 1970

Registration Fee
The fee for registration as exporter/importer is Ks 5,000 for one year and Ks 10,000 for
three years. The same fees are payable on renewal.
Goods which may be Exported
Myanmar products can be exported with the exception of some selected items like teak,
rice, etc. under the export licence issued by Ministry of Trade.
Export Licence Fee
Generally there is no export licence fee. However, if hardwoods are to be exported in log
form. the following service fees are payable to the Ministry of Trade.
Sr. No. FOB value of the Licence Service Fee
(Kyat) (Kyat)
1. 1 to 50,000 25,000
2. 50,001 to 100,000 50,000
3. 100,001 to 150,000 75,000
4. 150,001 and Above 100,000

Validity Period of Export Licence

The validity period of export licence is normally 6 months. If necessary, the period may
be extended by the Ministry of Trade.
Goods which may be Imported
All goods which are not prohibited by the respective government department, can be
imported under the import licence issued by the Ministry of Trade.
Import Licence Fee
Import licence fees are payable on all imports from abroad, it includes those imports for
which import permits are not required, those imported by means of a permit, an import
licence or open general licence; imports through the border and those imported for
general trading purposes by the State Economic Enterprises (SEEs), government
departments, co-operatives and private enterprises. Licence fees must be paid according
to the specified rate for import of goods on consignment basis either by SEEs or private
enterprises and entrepreneurs.With a view to reducing the cost of living and to being
competitive under the market economy, the Ministry ofTrade has issued an Import
Licence Fees Order on June 28, 1991, revising the licence fees payable on commodities
imported from abroad with effect from July 1, 1991.
The import licence fees payable on the C.I.F (Yangon) value of goods imported from
abroad ranges from a minimum fee of K 250 to a maximum of K 50,000 as follows:
C.I.F value Import Licence Fees
K 10,000 K 250
K 10,001 - K 25,000 K 625
K 25,001 - K 50,000 K 1,250
K 50,001 - K 100,000 K 2,500
K 100,001 - K 200,000 K 5,000
K 200,001 - K 400,000 K 10,000
K 400,001 - K 1,000,000 K 20,000
K 1,000,001 - and above K 50,000
Licence fees must be paid before the date prescribed in the import licence/permit. Those
import licence/permit for which licence fees have been paid may be extended by another
three months, if such extension is necessary.
If amendment of any item mentioned in the original import licence/permit is to be made,
a fee of 500 Kyats for each item so revised or 2 per cent of the total value of the licence
or permit, whichever is less, must be paid as correctional fees.
Exemption from licence fee has been granted to organisations, companies and joint
venture corporations permitted by the Union of Myanmar Foreign Investment Law on the
import of such goods as machinery, equipment, instruments, machinery components,
spare parts and materials used in the enterprise and imported as they are actually required
for use during the period of construction, with foreign capital prescribed by the Union of
Myanmar Foreign Investment Commission. Such exemption also includes raw materials
and packing materials imported for the first 3 years commercial production in order to
export finished goods following the completion of construction.
Note: If it is beneficial to the State and to the organisations, companies and joint venture
corporations in which investment is made, exemption from the levy of import licence fee
will be granted as may be appropriate for a further period after the completion of the said
3 years.
Although the enterprises permitted under the Union of Myanmar Foreign Investment Law
are granted exemption from import licence fees they will be allowed to import only after
obtaining an Import Licence or Open General Licence.
Exemption of import licence fee on imported raw materials for the production of finished
goods for general trading within the Union of Myanmar, which is not covered by the
permit of the Union of Myanmar Foreign Investment Commission will not be granted.
With effect from February 1993, the following items have been exempted from licence
fees:
a. fertilisers.
b. agricultural machinery and implements.
c. pesticides.
Validity Period of Import Licence
The validity period of import licence is normally 6 months. However, if requested, this
period may be extended by the Ministry of Trade.
Export Procedure
 1. Registered exporter must obtain an export licence, in conformity with the rules
and regulations laid down by the Directorate of Trade. No fee is charged for the
issuance of an export licence.
2. An irrevocable Letter of Credit has to be opened at the Myanma Investment and
Commercial Bank by the buyer through a correspondent or acceptable bank.
3. The vessel the cargo is to be shipped by has to be nominated by the buyer.
4. Myanma Port Authority has to be contacted for the shipment of cargo that is to be
shipped on F.O.B. basis.
5. Preshipment inspection, if required, will be conducted by Inspection and Agency
Services with respect to specification, weight, quality and packing.
6. Details of the cargo, such as shipping bills, other shipping documents and customs
pass etc., must be presented to the Bank for transaction.

Import Procedure

1. Registered importer is required to open foreign exchange account at a Bank in

order to apply for an import licence from the Directorate of Trade.
2. In applying for an import licence, the application shall have attached the sales
contract and/or proforma invoice mentioning detailed specifications, mode of
packing, and delivery phasing.
3. Import licence fees payable on the C.l.F. (Yangon ) value of the goods imported
from abroad is mentioned under Chapter IV.
4. An irrevocable letter of credit (L/C) has to be opened by the importer at the Bank.
5. If the purchase is made on F.O.B. basis, the importer has to secure insurance from
Myanma Insurance and freight booking from Myanma Five Star Line.
6. After receiving shipment advice from the suppliers, the importer has to arrange
for the clearance of the goods.

2. Customs Clearance Procedures for Export and Import

The Tariff Law was enacted on March 12, 1992 with a view to assisting the market
economy system in order to facilitate external trade. In accordance with the Law, a
notification was issued to regulate the classification of imported goods and assessment of
duties. For modernisation and standardisation, in line with the international practice, the
Harmonized Commodity Description and Coding System (H.S) was introduced in April
1992.
Customs Declaration Form for Import/Export Clearance
Import
Under the existing rules and regulations all incoming consignments of goods must be
cleared through the Customs Department under an Import Declaration form (CUSDEC -
1). The Import Declaration form is to be accompanied by the following documents: -

1. Import licence / permit

2. Invoice
3. Bill of Lading or Air Consignment Note
4. Packing list
 5. Other Certificates and permits issued by the relevant Government Departments as
a condition for Import.

Customs duty is payable according to the tariff schedule. Import duty is levied on the tax
base, assessable value, which is the sum of C.l.F. value and landing charges of 0.5 per
cent of C.I.F. value. Together with customs duty, Commercial tax is levied on the
imported goods basing on the landed cost which is the sum of assessable value and
import duty. These taxes are collected at the point of entry and the time of clearance.
Export
On the shipment of export commodities an Export Declaration Form (CUSDEC - 2) must
be submitted to the Customs Department together with the following documents:

1. Export licence / permit

2. Invoice
3. Packing list
4. Sales Contract
5. Shipping Instruction
6. Letter of Credit or General Remittance Exemption Certificate
7. Payment advice referring Inward Telegraphic Transfer Private No./Inward
Telegraphic Transfer Government No.
8. Sample of goods
9. Forest pass for the shipment of forestry produce
10. Health Certificate for the export of live animals
11. Forest permit for the export of wild live animals
12. Other certificates and permits as required by the government agencies concerned.

Customs duty is levied on exported goods according to the tariff schedule and export duty
is levied on the tax base F.O.B value.
Customs Declaration Form for Transit Trade
All commodities, not for domestic consumption and imported for transit trade, are
required to furnish the prescribed form, ie. CUSDEC - 3, attached with the following
documents:

1. Bill of Lading or air consignment note or truck note

2. Transit Trade Licence or permit issued by the Ministry of Trade
3. Commercial Invoice
4. Sales contract between seller and buyer or contract between seller and authorised
agent
5. Guarantee bond, undertaken in strict compliance with regulations: failure to
export will be dealt with according to the existing law.

Transit duty is based on the C.l.F. value of the imported goods and will be levied at 2.5%
ad valorum rate.
Clearance under Special Order
A special order may be granted for rapid clearance of the following types of goods
imported by sea or air:
 1. Perishable goods
2. Goods immediately required by government projects and enterprises
3. Live animals, human remains.

Temporary Importation
Commodities, imported temporarily for inward processing. such as industrial raw
materials, packing materials are exempted from customs duty for a period of two years
under bond to re-export within a time limit.
Claims for Drawback
Seventh-eighth of the customs duty paid on goods that could be easily identified will be
refunded when such goods are withdrawn from the country again under the drawback
facility in accordance with the following conditions :-

1. The re-export goods must be identical with those imported on payment of duty.
2. Two years must not have elapsed since their importation in cases where the port
of re-export is the same as that of import. The time may be extended up to three
years on application.
3. The re-export goods must not be included among the articles declared to be
incapable of being identified.
4. The goods must not be re-exported to a port to which shipment under claim for
drawback is prohibited.
5. The goods exported must not be of less value than the amount of drawback
claimed.
6. The claim for drawback should not ordinarily be less than 5 kyats in respect of
any single shipment.
7. The goods must not be included among the articles declared to be prohibited or
restricted.

EXPORT PROCEDURES
OBJECT
Procedure for Export under EDI system
Departmental clarifications
Exports where LC has expired
Procedure for project exports
Movement of empty containers for stuffing purposes
Stuffing of containers outside the docks
Stuffing of exports at factory under drawback, bond, free and
duty
Procedure for manufacturer-exporters
Procedure for merchant -exporters
Movement to gateway ports/Air ports by road
Movement by coastal vessels
Short shipment notice
 Percentage of goods to be examined
Self-certification and minimal physical examination
Return of export goods from docks
Export of Handloom products
Export of handicrafts
Export of narcotic Drugs and Psychotropic Substances.
Silk-pre-shipment inspection
IMPORTANT CASE LAWS
OTHER REFERENCES
LEGISLATIVE REFERENCES

OBJECT:

Section 40: As per this section, the person in charge of the conveyance shall not
permit loading any export goods unless duly passed by the proper officer of
Customs.

Section 50 of the Customs Act, 1962 is a statutory provision for entry of goods for
exportation. This section describes that the exporter has to file the shipping bill in case of
export by air or sea or a bill of export in respect of export by land.

Section 51 empowers the proper officer to make an order of clearance of export

goods after he is satisfied that

a. the goods sought to be exported are not prohibited goods,

b. duty assessed, if any, and other charges are paid on the export goods
have been paid by the exporter

Shipping Bill(Manual):

In order to effect exports under the manual system the exporters are required to file
shipping bills in the format prescribed on the Shipping Bill and Bill of Exports (Forms)
Regulations, 1992. Separate shipping bills are prescribed for:

1. Exports under duty drawback claim

2. Export of dutiable goods
3. Export of duty free goods.
4. Export of duty free goods., ex-bond.

Date For Determination Of Rate Of Duty Or Tariff Value:

Section 16, which provides for determination of rate of duty, does not apply to
passenger baggage and postal exports.

If a shipping bill or bill of export is filed, the rate of duty in force on the date on
which the order of clearance and permission of loading is granted under Section 51,
2ill apply.

In all other cases the rate in force on the date of payment of duty will apply.

Determination Of Exchange Rate:

As per section 14 of the Customs Act the value of the export goods shall be
calculated with reference to rate of exchange as in force on the date on which a
shipping bill or a bill of export as the case may be is presented under section 50. The
rate of exchange means the rate determined by the Central Government or
ascertained in such a manner as the Central Government may direct. The Central
Government normally issues notification to this effect periodically.

Departmental clarifications

When the export goods are examined at source and sealed by the Central Excise
officers, in respect of whom duty drawback is proposed to be claimed, it should be
certified in the following manner:

"Certified that the description and value of the goods covered by this invoice and
the particulars amplified in the packing list with a view to ascertaining drawback
amount at the port of export, have been checked by me and that the goods have
been packed and sealed with Central Excise lead seal or signet seal under my
supervision

Countersigned Signed
Superintendent of C.Excise Inspector

Exports where LC has expired.

If the date of LC validity has expired, but the date of negotiation is valid, exports
may be allowed, as the documents will be negotiated. If both the dates have expired,
exports should be allowed on "Documents against Payment" basis.
Procedure for project exports

Application for registration of Project Export should be made in the form vide
Annexure ‘A’ in the export Deptt. along with the enclosures.

The exporters should produce necessary documents and information in order to

enable the Export Deptt.

1. Shipping Bills covering project export should also be prepared like all other
shipping Bills keeping in view the requirements for the declaration of
separate quantity, net weight and other particulars item wise/product wise so
as to enable the A.Os, to assess each item in the Shipping Bill accurately from
various aspects like valuation, export inspection code ETC.
2. Each S/Bill, invoice and G.R. Forms under this scheme should also bear
following declaration in red ink in large scripts on the top margin:-

"PROJECT EXPORT" and also the registration number given by this department
or suitable stamp as made by the Export Depts. may be used.

3. Each S/Bill, invoice and G.R. Forms should bear an endorsement stating therein
letter number or approval number assigned to the Project Export by the Reserve
Bank of India ior by the authorised bank.

4. As provided under the scheme, the exporters may make shipments from ports
other than the major port with which the contract has been registered. For availing
of this facility, release orders for allowing shipment from other ports will have to be
obtained from Export Deptt. of this Customs House.

5. The request for release order for making shipments from other ports will he
scrutinized on the basis of proforma invoice produced along with written
request for this purpose. The said invoice will be scrutinized and assessed in
the same way other S/Bills are processed in the Export Dept As per Rules
and practice and in the light of this Public Notice but to the extent relevant
for issuing the release order. They would be entitled to receive the drawback
for such part shipments through the other ports from Custom House.
6. The exporter should see that they comply with various stipulations in terms
of the undertaking given by them vide application form in Annexure’A.
Failure to comply with the same will lead to action being taken against them
in accordance with the rules applicable in this regard.

Movement of empty containers for stuffing purposes

In the interest of export promotion, it has been directed that no separate permission
is required from Customs for movement of empty container from the ICD/CFS/ for
the purpose of stuffing in the factory. It is necessary that the exporter must have
obtained general permission for stuffing the export goods in the factory. The
movement is however subject to usual checks at exit gate of the ICD/CFS.

Stuffing of containers outside the docks

The exporter desirous of taking the containers outside the port premises for the
purpose of stuffing has to make a requisition to the concerned steamer agent, who
will in turn make an application to the Assistant/Deputy Commissioner (Docks).
Details of goods to be exported, number of containers required along with container
numbers should be given by the steamer agent. These particulars are entered in a
register maintained for this purpose. A preventive officer/Inspector attached to
Container cell will inspect the container for making sure that it is empty and seal it
with Customs seal.

Upon receipt of stuffed container, the steamer agent will again intimate the Docks to
enable it to close the entry in its register. If the examination report of the Central
Excise offices is inadequate, the Customs officers will subject the goods to re-
examination at docks. If the load is less than one container load, facility for stuffing
at factory will not be extended. In all such cases, the goods will be examined at
docks.

Stuffing of exports at factory under drawback, bond, free and duty

Permission for stuffing at factory will be granted for three months at a time for
following category of goods:

I. Perishable frozen seafood, fish, meat, similar

items, agricultural, horticultural, floricultural
and other similar goods.
II. All goods in the factory of production, whether
excisable or not.
III. Articles of Food and Pharmaceutical goods
which require specialized packing in order to
protect from contamination, deterioration etc.
IV. Glassware and similar articles of fragile nature.
V. Exports under duty free shipping bills.

In case of drawback shipping bill, factory stuffing will be allowed only in the factory
of manufacture. In other cases, it will be considered on case by case basis.
Procedure for manufacturer-exporters

i. A request letter for factory stuffing should be made mentioning the

detailed reasons for such request.
ii. A copy of Central Excise registration attested by the Divisional
Authority should be submitted in case of Central Excise assesses. A
copy of SSI registration, NOC from jurisdictional AC/DC indicating
their willingness to deputy officers for supervising the stuffing, should
also be submitted.
iii. Particulars of export performance should be submitted.

Procedure for merchant -exporters

In addition to the above particulars submitted by the manufacturer-exporters, for

warehouse stuffing of non-excisable goods, the merchant-exporter should submit a
NOC.

Movement to gateway ports/Air ports by road

If there is likelihood of delay in exports on account of non-availability of railway

facility, upon request of the custodian, movement by road may be permitted. The
custodian has to execute a bond for this purpose before the Asisstant Commissioner
in-charge of the ICD/CFS. This bond will be redeemed after receipt of transference
copy of the shipping bill from the gateway port, confirming the export.

Movement by coastal vessels

Board circular has authorised movement of containers carrying export goods from
small coastal ports by coastal vessel to the gateway ports. This export will be
allowed at the gateway port subject to the condition that a bond has been executed
as per regulation 4 of the Goods Imported (Conditions of transshipment)
Regulations, 1995 and export goods are manifested through the gateway port (port
of transshipment or hub port), such as for instance, "To Amsterdam, through
Chennai".

The Board circular lays down certain procedures as under:

1. Shipping bill has to be presented in sextuplicate, i.e., original,

duplicate, two transference copies and one export promotion copy
(The PN makes no reference to what is the sixth copy for). The
 shipping bill has to clearly indicate that it is for export through
gateway port.
2. Examination of cargo, stuffing and sealing will be done in the usual
manner.
3. Appraising officer will pass "let export" order on both the
transference copies of shipping bill. Export Promotion copy of
shipping bill will be finally endorsed only upon receipt of transference
copies of shipping bills.
4. After verification by preventive officer, the master of the vessel will
endorse the duplicate and both transference copies to the effect that
the goods are on board. The transference copies are delivered through
the Superintendent Docks, in sealed cover to the steamer agents, who
will be responsible for delivering it along with the container at the
gateway port.
5. Shipping agent will file EGM in respect of goods transshipped to
gateway port.
6. At the gateway port, the container and the transference copies of
shipping bills will be delivered to dock preventive section. After
entering the date of receipt of the copies and also in the register
maintained for that purpose, the copies of shipping bill will be sent to
appraising and drawback sections.
7. At the time of loading the containers on the mother vessel, the
containers will be examined and endorsement will be made on the
transference copies. If the seals are broken the Superintendent docks
will examine the contents and make necessary endorsement on the
transference copies. Short shipment or shut out cargo particulars will
also be recorded thereon. In case of shut out cargo, the exporter has to
file another shipping bill for export of remainder of cargo on another
vessel.
8. After the preventive officer makes entry of name of mother vessel and
date of shipment on the transference copy, one copy will be handed
over to the steamer agent on the strength of which EGM will be filed.
Second copy of shipping bill will be delivered in a sealed cover to the
shipping agent for delivery to the Assistant Commissioner at the port
of filing of shipping bill. He will endorse export promotion copies,
AR4, processing of documents under duty drawback, DEEC, DEPB
purposes.

Short shipment notice

Notice of Short-Export Rules, 1963 casts the responsibility to furnish

information of short shipment, on the exporter. The exporter is required to
furnish such information within seven days from the date of departure of the
conveyance, to the proper officer:

1. Number of packages short shipped.

 2. Description of goods.
3. Quantity short shipped.
4. Value of goods.
5. Country of destination.

Alternatively, he may present the shipping bill or bill of export for cancellation or
amendment.
Rule 3 seeks to impose a penalty of Rs.100 maximum for failure to comply with this
condition.

Percentage of goods to be examined

The assessing officer’s name seal affixed on the assessed shipping bill usually also
indicates the percentage of goods checked. An option exists to indicate whether 5%
or 10% of goods are examined. In many cases, the Ministry has noticed that the
percentage of checking done is not indicted by striking out the in applicable
percentage. The assessing officers are directed to indicate the specific percentage of
export goods examined by them.

Self-certification and minimal physical examination

The Board has directed that at the Gateway port, for containers brought
under self-sealing procedure, routine examination should be dispensed with.
For such containers, only one out of five containers should be opened for visual
inspection of the content. Thereafter, from each opened container a minimum of two
packages and maximum of 5% packages may be examined.

Exporters seeking the facility of self-certification have to get themselves registered

with the Custom House. This registration has to be renewed in July every year. At
the time of renewal, particulars of exports made after obtaining the facility with
shipping bills number, value, description should be furnished, duly authenticated by
the jurisdictional Central Excise Assistant Commissioner or Deputy Commissioner.

Drawal of exports samples – streamlining of procedure

1. In case of manufacturer exporters who have in-house testing facility, their test
reports may be relied on for the purpose of logging of DEEC book as well as for
verification under Pass Book Scheme, if the following conditions are satisfied:

Good Manufacturing Practice certificate has been granted by the Drug

Controller,

Approved testing facilities by ISI/CSIR/Ministry of Science and Technology or the

nodal Ministry,

Holds a ISO 9002 certificate.

Such an eligible manufacturer has to enclose the in-house test certificate along with
shipping bill.

1. Test results obtained from Central Excise test laboratories will be valid for six
months, provided the test reports bring out the technical characteristics of inputs, as
required under various schemes (DEEC, pass book scheme etc.). A certified copy of
this test report along with examination report may be produced.

1. Customs authorities would have the right to draw surprise samples

and get detailed test and analysis done

All these procedures are followed only in respect of manufacturer-exporters.

Return of export goods from docks

1. An application for taking export cargo back to town will be presented

to the Export Department together with relevant duplicate copy of the
shipping bill. After scrutiny, if there are no objections, it will be endorsed to
the concerned shed appraiser for examination of goods.
2. About 5% of the goods will be examined.
3. Incase of factory stuffed containers also, these will be opened and subject to
5% checking
4. After satisfying himself that the goods are in conformity with the shipping
bill, he will allow the goods to be taken to town under preventive supervision.
5. If discrepancies are noticed, the shipping bill will be returned by the Supdt
(Docks) back to the Exports department, with suitable remarks.

Export of Handloom products

Handloom Export Promotion Council (HEPC) will endorse all the shipping bills
containing cotton handloom products whether they belong to merchant exporters or
manufacturer exporters to the effect that the goods covered by shipping bills are
handloom products and with regard to all shipping bills so endorsed by HRPC,
certificate of non-availment of modvat credit need not be insisted.

Export of handicrafts

In case of handicraft exports, routine references for obtaining NOC from the
Archaeological Survey of India, should be avoided. In order to equip the Customs
officers to understand and decide what kind of cases have to be referred to ASI or
Wild Life department, in the NACEN training program, it has been proposed to
incorporate in the curriculum, subjects such as Antiquities Act and law regarding
export of wild life.

For duty drawback purposes, in terms of General Note No.11 of Drawback Table,
the exporters of handicrafts of Brass or Iron have to produce a certificate from the
Development Commissioner that the said goods are handicrafts. The Export
Promotion Council for handicrafts may also issue this certificate. However, no
certificate of non-availment of modvat is required as handicrafts are
unconditionally exempt from payment of Central Excise Duty.

Export of narcotic Drugs and Psychotropic Substances.

In terms of NDPS Act, 1985, export or import of items falling under Schedule-I is
prohibited. Other Psychotropic substances may be exported with the export
authorization issued by the Central Narcotic Bureau. Besides, Ministry of
Commerce Public Notice No.79/EXP(PN)/96-97, dated 2.1.1996 allows export of
Ephedrine, Pseudoephedrine and Acetic Anhydride against NOC issued by the
Narcotic Control Bureau. Export of these goods will be permitted only upon
compliance of these conditions.

Silk-pre-shipment inspection

Exporters will bring the consignments of silk to the customs point. For each
consignment, an application for pre-shipment inspection in prescribed forms of
Central Silk Board (CSB) will be made accompanied by two copies of export
invoices, two packing lists and a sample swatch of 6" square dimension.

After the inspectors check the correctness of HS code and authenticate the invoices, the
customs will randomly select consignments for check by the CSB Inspector. The parcels
will be checked for purity, yarn constituents, construction particulars with sample
attached to the application and description contained therein. If parcels conform to
samples the CSB inspector will issue an endorsement to that effect to customs on the
invoice. If there is a mismatch, the inspector will inform customs in writing for
appropriate action by customs. CSB will conduct examination and submit report on the
same day. Thereafter, sample swatch will be analyzed in the lab for fibre composition.
This will also be reported to customs. This procedure seeks to avoid dual inspection, one
by CSB and the other by

Payment instruments
Types
The most frequently used cashless payment instruments in Europe are: credit transfers,
direct debits, cards and cheques. Electronic money (e-money) is little used at the moment
but has the potential to grow and may become a major payment instrument in the future.

Credit transfers are instructions from the payer to his/her bank to debit his/her bank
account and to credit the beneficiary’s bank account. Credit transfers are the most widely
used payment instrument in Europe. They account for around one-third of all non-cash
payments.

Direct debits are pre-authorised debits on the payer’s bank account that are initiated by
the beneficiary. They are often used for recurring payments. Around one-quarter of all
non-cash payments are effected as direct debits.

Payment cards (debit or credit cards) are cards issued by a credit institution or card
company. They indicate that the holder of the card may charge his/her account at the
bank (debit card) or draw on a line of credit (credit card) up to an authorised limit. Cards
are used slightly less than one-third of non-cash payments.

A cheque is a written order from one party (the drawer) to another (the drawee, normally
a bank), requiring the drawee to pay the indicated sum on demand to the drawer or to a
third party specified by the drawer. Usage of cheques is still high in some countries
(especially in France, Ireland, Portugal) but diminishing. In most euro area countries
cheques are practically non-existent.

Electronic money (e-money) is a monetary value (claim on the issuer) which is stored in
an electronic device and accepted as means of payment by undertakings other than the
issuer. E-money can take the form of pre-paid cards, or it can be stored on a personal
computer. back to top
Payment Instruments in India

3.1. Currency1 is an important means of payment in India, with 19% of M3 represented

by
currency, as against its share of 6 to 7% in advanced countries. It is supplemented by
cheques
and drafts for payments in commercial transactions. Various other paper instruments like
a
Banker's cheque, Payment order, Payable 'At Par' cheques (Interest/Dividend warrants,
refund
orders, gift cheques etc.), are also used to cater to the specific payment needs. The
statutory basis
for these instruments was provided by the Negotiable Instruments Act, 1881 (NI Act).
3.2. The NI Act, 1881, defines a Negotiable Instrument as a promissory note, Bill of
Exchange
or cheque. A Bill of Exchange is an instrument in writing containing an unconditional
order,
signed by the maker, directing a certain person to pay a certain sum of money only to, or
to the
order of, a certain person or to the bearer of the instrument. A Hundi is a Bill of
Exchange in an
Indian language, governed by customs and local usage. The NI Act, however, does not
govern
Hundis. A Bill of Exchange may therefore, include a Hundi, but Hundi may not be a Bill
of
Exchange.
3.3. A cheque is a Bill of Exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand. The maker of a cheque is called the 'drawer', and the
person
directed to pay is the 'drawee'. The person named in the instrument, to whom or to whose
order
the money is, by the instrument directed, to be paid, is called the 'payee'. A cheque is a
Negotiable Instrument, which can be further negotiated by means of endorsement and is
payable
on demand. A cheque payable to bearer is negotiable by the delivery thereof, and when it
is
payable to order is negotiable by the holder by endorsement and delivery thereof. A
cheque has
to be presented for payment by the payee or holder to the acceptor, maker or drawer. A
cheque
payment is a debit transaction as the transaction regarding the payment of a cheque is
initiated by
the payee or beneficiary.
1 Reserve Bank of India assumed responsibility of note issue from the Controller of
Currency in 1935. The sole right
to issue bank notes vests with the Reserve Bank under Section 22, of the RBI Act 1934.
In terms of Section 23, of
the RBI Act 1934, the Issue Department handles the work relating to the issue of bank
notes. The Government,
however, continued to issue Currency Notes, i.e. Re.1 notes till 1994.
3.4. A cheque is not cash, as it does not assume the finality of payment. The funds may
not be
available with the drawer or the drawer may have withdrawn funds from his bank account
in the
interim leading to the possibility of the cheque being dishonoured on presentation. In
addition,
the banks levy a collection charge based on postal costs as well as the value of the cheque
in case
of outstation cheques. It takes time to realise the proceeds of a cheque payment,
especially if the
cheque is an outstation one. For these reasons, the cheque is not always acceptable in
several
business transactions particularly where the drawer and the payee are notknown to each
other. In
many commercial transactions, the sellers of goods and services prefer to have a payment
instrument where the sum of money payable to the payee is guaranteed. The demand
draft is one
such instrument.
3.5. The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank
undertakes to make payment in full when the instrument is presented by the payee for
payment.
The demand draft is made payable on a specified branch of a bank at a specified centre.
In order
to obtain payment, the beneficiary has to either present the instrument directly to the
branch
concerned or have it collected by his / her bank through the clearing mechanism.
3.6. Banker's cheque is another payment instrument which is used by banks to settle
payment
obligations on behalf of their customers. This instrument is guaranteed by the bank for its
full
value and is similar to a demand draft. In practice, these instruments are payable at the
branch of
issue and are used for payment within the local clearing jurisdiction.
3.7. Payment Orders are issued by banks for payments made on behalf of the bank. These
instruments are signed by a banker and carry the guarantee of the bank on the availability
of the
funds. These instruments are payable at the branch of issue.
3.8. Carrying large amounts of cash is very risky, especially when one is travelling.
Travellers
cheques are a secure and convenient alternative to carrying cash. These are prepaid
instruments
available in fixed denominations. The holder of the Travellers cheque is required to sign
the
instrument upon purchase and again in the presence of the merchant establishment at the
time of
making payment or realising proceeds thereof. Travellers cheques can be replaced if they
are lost
or stolen at no additional cost. Travellers cheques are available in both domestic and
international currency. These instruments can be readily exchanged at bank branches
anywhere
and in several merchant establishments.
3.9. The payment of periodic interest on fixed deposits with companies as well as
government
securities is a different class of payment for which a special type of payment instrument
called an
Interest Warrant is issued. These are special types of cheques which are 'payable at par' in
various branches of a bank across the country. The term 'at par' indicates that the full face
value
of the instrument has to be credited to the account of the payee, without recourse to any
deductions in the form of collection charges, which banks usually levy whenever an
instrument
is sent for collection. Dividend warrants too are similar to the interest warrants and are
usually
payable 'at par' to the shareholders of a company2.
3.10. Interest warrants have been in vogue for a very long time, as can be recognised by
the
fact that servicing of public debt entails payment of interest to holders of Government
Securities.
The servicing of public debt is done by the Public Debt Office of Reserve Bank of India,
which
issues interest warrants, payable 'at par' at all offices of Reserve Bank of India and State
Bank of
India.
3.11. Interest or Dividend warrants and refund orders are issued by the companies with a
prior
funding arrangement with a bank. The company funds an account with the bank with a
sum
equal to at least the total value of the interest warrants proposed to be issued. The bank,
provides
the 'at par' facility whereby the instruments drawn on that particular bank are payable at
par in
selected branches of the bank as also the branches of the correspondent bank at various
centres
across the country. These warrants are honoured by the paying branches and the funding
account
of the company is debited.
3.12. Corporate clients are also extended the facility to issue Current Account Cheques 'at
par'
by their bankers on a very selective basis. This is largely done to facilitate payments to
upcountry suppliers and others. Similarly for payments from retailers and other upcountry
buyers
of corporate products, banks offer collection accounts facilities to reputed companies.
The
payments to the company are channelled through special accounts throughout the country
and
repatriated to the headquarters' account.
3.13. The payment instruments described above are all paper based and require to be
tendered
at specific banks for payment either in person or through another bank in clearing or
through
collection. Under the N.I. Act, 1881, the cheque or the instrument has to be presented to
the
drawer. The chief disadvantage with the cheque and the demand draft is that these
instruments
have to be physically presented, often leading to delays in payment. To overcome delays,
fund
transfers through the medium of Telex were introduced. The Telegraphic Transfers
represent
payment instructions sent in a telex mode to an upcountry branch of the same bank or to a
correspondent bank branch to credit the beneficiary's account with a given amount. A
cipher
code is appended to the text of the message to ensure its integrity and authenticity during
transit.
2 Section 205, sub-section 5 of the Companies Act, permits a company to pay any
dividend payable in cash, either
by cheque or warrant. Section 206, sub-section 1(a), reiterates that the dividend amount
should be paid only to the
registered shareholder or to his order or to his banker.
3.14. Cheque volumes have risen substantially through the last three decades as can be
seen
from Figure 3.1. Cheque volumes have risen steadily in all urban centres, their growth in
metropolitan centres and other major cities being much faster than the rest. Mumbai, for
example, has a substantially higher volume than the other metropolitan centres. In recent
times,
cheque volumes in cities such as Ahmedabad, Surat and Vadodara have registered sharp
increases.
Figure 3.1. Growth in Cheque Clearing - Volumes and Value
(1 Crore = 10 million)

The growth of cheque volumes could be attributed partly to the rapid expansion of bank
branches
through the seventies and the consequent spread of banking as also partly to the
increasing
tendency of the people to invest in financial assets like shares and debentures. There has
also
been a significant growth in such corporate instruments as fixed deposits. This is
reflected in the
substantial increase in the use of payable 'At Par' instruments for dividends, interests and
refund
orders.

3.15. The substantial increase in the volumes of cheques indicates the need for upgrading
the
existing infrastructure for exchange and settlement from manual clearing arrangement to
more
efficient and electronically driven systems. Manual sorting and listing of instruments
result in
long delays as well as errors in computation of the total claims. The settlement process
itself
would get delayed and result in the problem of unreconciled entries between the banks.
3.16. Another important payment instrument which is widely popular is the Money Order
service offered by the Department of Posts, Government of India. The Money Order
enables an
individual to send remittances to a third party under the aegis of the Post Office. It is a
point-topoint
delivery of funds. The originating Post Office collects the full amount of remittance as
also
a commission (service charge) from the individual remitting the funds and sends the
advice to
the destination Post Office. At the destination Post Office, the funds are paid to the
beneficiary. The money order can be sent as an ordinary paper based payment advice or
as a Telegraphic Money Order. The Telegraphic Money Order is faster as the payment
advices are sent through
Telex or Telegraph. The customer, of course, has to pay higher service charges for this
facility.
3.17. The Postal Order is another payment instrument of the Department of Posts. The
Postal
Order is issued denomination-wise, which can be encashed by the beneficiary after due
identification at the Post Office on which it is drawn. Postal Orders like the Money
Orders are
independent of the banking system. Both these instruments are GIRO payments and are
credit
transactions as opposed to a cheque which is a debit payment mechanism.
Chapter 5
Open Account

An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which is usually in 30 to 90 days. Obviously, this option
is the most advantageous to the importer in terms of cash flow and cost, but it is
consequently the highest-risk option for an exporter. Because of intense competition in
export markets, foreign buyers often press exporters for open account terms. In addition,
the extension of credit by the seller to the buyer is more
common abroad. Therefore, exporters who are reluctant
to extend credit may lose a sale to their competitors.
However, though open account terms will definitely
enhance export competitiveness, exporters should thoroughly
examine the political, economic, and commercial
risks as well as cultural influences to ensure that payment
will be received in full and on time. It is possible to
substantially mitigate the risk of non-payment associated
with open account trade by using such trade finance
techniques as export credit insurance and factoring.
Exporters may also seek export working capital financing
to ensure that they have access to financing for production
and for credit while waiting for payment.

Key Points

• The goods, along with all the necessary documents,

are shipped directly to the importer who has agreed
to pay the exporter’s invoice at a specified date,
which is usually in 30 to 90 days.
• The exporter should be absolutely confident that the
importer will accept shipment and pay at the agreed
time and that the importing country is commercially
and politically secure.
• Open account terms may help win customers in competitive
markets and may be used with one or more
of the appropriate trade finance techniques that
mitigate the risk of non-payment.

chArActeristics of An
open Account
Applicability
Recommended for use (a) in low-risk trading
relationships or markets and (b) in competitive
markets to win customers with the use of one or
more appropriate trade finance techniques.
Risk
Significant risk to exporter because the buyer could
default on payment obligation after shipment of
the goods.
Pros
• Boosts competitiveness in the global market
• Helps establish and maintain a successful trade
relationship
Cons
• Significant exposure to the risk of non-payment
• Additional costs associated with risk mitigation
measures

How to Offer Open Account Terms in Competitive Markets

Open account terms may be offered in competitive markets with the use of one or more
of
the following trade finance techniques: (a) export working capital financing, (b) govern-
ment-guaranteed export working capital programs, (c) export credit insurance, and (d)
export factoring. More detailed information on each trade finance technique is provided
in
Chapters 6 through 9 of this guide.

Negotiable instruments distinguished from contracts

A negotiable instrument can serve to convey value constituting at least part of the
performance of a contract, albeit perhaps not obvious in contract formation, in terms
inherent in and arising from the requisite offer and acceptance and conveyance of
consideration. The underlying contract contemplates the right to hold the instrument as,
and to negotiate the instrument to, a holder in due course, the payment on which is at
least part of the performance of the contract to which the negotiable instrument is linked.
The instrument, memorializing (1) the power to demand payment; and, (2) the right to be
paid, can move, for example, in the instance of a 'bearer instrument', wherein the
possession of the document itself attributes and ascribes the right to payment. Certain
exceptions exist, such as instances of loss or theft of the instrument, wherein the
possessor of the note may be a holder, but not necessarily a holder in due course.
Negotiation requires a valid endorsement of the negotiable instrument. The consideration
constituted by a negotiable instrument is cognizable as the value given up to acquire it
(benefit) and the consequent loss of value (detriment) to the prior holder; thus, no
separate consideration is required to support an accompanying contract assignment. The
instrument itself is understood as memorializing the right for, and power to demand,
payment, and an obligation for payment evidenced by the instrument itself with
possession as a holder in due course being the touchstone for the right to, and power to
demand, payment. In some instances, the negotiable instrument can serve as the writing
memorializing a contract, thus satisfying any applicable Statute of Frauds as to that
contract.

[edit] The holder in due course

The. rights of a holder in due course of a negotiable instrument are qualitatively, as

matters of law, superior to those provided by ordinary species of contracts:

• The rights to payment are not subject to set-off, and do not rely on the validity of
the underlying contract giving rise to the debt (for example if a cheque was drawn
for payment for goods delivered but defective, the drawer is still liable on the
cheque)

• No notice need be given to any party liable on the instrument for transfer of the
rights under the instrument by negotiation. However, payment by the party liable
to the person previously entitled to enforce the instrument "counts" as payment on
the note until adequate notice has been received by the liable party that a different
party is to receive payments from then on. [U.C.C. §3-602(b)]

• Transfer free of equities—the holder in due course can hold better title than the
party he obtains it from (as in the instance of negotiation of the instrument from a
mere holder to a holder in due course)

Negotiation often enables the transferee to become the party to the contract through a
contract assignment (provided for explicitly or by operation of law) and to enforce the
contract in the transferee-assignee’s own name. Negotiation can be effected by
indorsement and delivery (order instruments), or by delivery alone (bearer instruments).
In addition, the rights and obligations accruing to the transferee can be affected by the
rule of derivative title, which does not allow a property owner to transfer rights in a piece
of property greater than his own.

[edit] History

Common prototypes of bills of exchanges and promissory notes originated in China.

Here, in the 8th century during the reign of the dynasty Tang used special instruments –
feitsyan for the safe transfer of money over long distances.[citation needed] Later such
document for money transfer used by Arab merchants, who had used the prototypes of
bills of exchange – suftadja and hawala in 10–13th centuries, then such prototypes had
used by Italian merchants in the 12th century. In Italy in 13–15th centuries bill of
exchange and promissory note obtain their main features and further phases of its
development have been associated with France (16–18th centuries, where the
endorsement had appeared) and Germany (19th century, formalization of Exchange
Law). In England (and later in the U.S.) Exchange Law was different from continental
Europe because of different legal systems.[citation needed]

[edit] Classes

Promissory notes and bills of exchange are two primary types of negotiable instruments.

[edit] Promissory note

A negotiable promissory note is an unconditional promise in writing made by one person

to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or
determinable future time, ertain]] in money, to order or to bearer. (see Sec.194) Bank
note is frequently referred to as a promissory note, a promissory note made by a bank and
payable to bearer on demand.

[edit] Bill of exchange

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money
to the payee. A common type of bill of exchange is the cheque (check in American
English), defined as a bill of exchange drawn on a banker and payable on demand. Bills
of exchange are used primarily in international trade, and are written orders by one
person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent
of paper currency, bills of exchange were a common means of exchange. They are not
used as often today.

Bill of exchange, 1933

A bill of exchange is an unconditional order in writing addressed by one person to

another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at fixed or determinable future time a sum certain in money to order or
to bearer. (Sec.126)

It is essentially an order made by one person to another to pay money to a third person.
A bill of exchange requires in its inception three parties—the drawer, the drawee, and the
payee.

The person who draws the bill is called the drawer. He gives the order to pay money to
the third party. The party upon whom the bill is drawn is called the drawee. He is the
person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor
when he indicates his willingness to pay the bill. (Sec.62) The party in whose favor the
bill is drawn or is payable is called the payee.

The parties need not all be distinct persons. Thus, the drawer may draw on himself
payable to his own order. (see Sec. 8)

A bill of exchange may be endorsed by the payee in favour of a third party, who may in
turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim
the amount of the bill against the drawee and all previous endorsers, regardless of any
counterclaims that may have disabled the previous payee or endorser from doing so. This
is what is meant by saying that a bill is negotiable.

In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it
can still be transferred to a third party, but the third party can have no better right than the
transferor.

[edit] In the Commonwealth

In the commonwealth almost all jurisdictions have codified the law relating to negotiable
instruments in a Bills of Exchange Act, e.g. Bills of Exchange Act 1882 in the UK, Bills
of Exchange Act 1908 in New Zealand, The Negotiable Instrument Act 1881 in India and
The Bills of Exchange Act 1914 in Mauritius. The Bills of Exchange Act:

1. defines a bill of exchange as: 'an unconditional order in writing, addressed by one
person to another, signed by the person giving it, requiring the person to whom it
is addressed to pay on demand, or at a fixed or determinable future time, a sum
certain in money to or to the order of a specified person, or to bearer.
2. defines a cheque as: 'a bill of exchange drawn on a banker payable on demand'
3. defines a promissory note as: 'an unconditional promise in writing made by one
person to another, signed by the maker, engaging to pay on demand, or at a fixed
or determinable future time, a sum certain in money to or to the order of a
specified person or to bearer.'

Additionally most commonwealth jurisdictions have separate Cheques Acts providing for
additional protections for bankers collecting unendorsed or irregularly endorsed cheques,
providing that cheques that are crossed and marked 'not negotiable' or similar are not
transferable, and providing for electronic presentation of cheques in inter-bank cheque
clearing systems.
The 1911 Encyclopædia Britannica Eleventh Edition has a comprehensive article on the
Bill of Exchange, detailing its history and operation, as understood at the time of its
publication.

[edit] In the United States

In the United States, Article 3 and Article 4 of the Uniform Commercial Code govern the
issuance and transfer of negotiable instruments. The various State law enactments of
Uniform Commercial Code §§3-104(a) through (d) set forth the legal definition of what
is and what is not a negotiable instrument:

§ 3-104. NEGOTIABLE INSTRUMENT.

“ ”
(a) Except as provided in subsections (c) and (d), "negotiable
instrument" means an unconditional promise or order to pay a fixed
amount of money, with or without interest or other charges described in
the promise or order, if it:

(1) is payable to bearer or to order at the time it is issued or first comes

into possession of a holder;

(2) is payable on demand or at a definite time; and

(3) does not state any other undertaking or instruction by the person
promising or ordering payment to do any act in addition to the payment
of money, but the promise or order may contain

(i) an undertaking or power to give, maintain, or protect collateral to

secure payment,

(ii) an authorization or power to the holder to confess judgment or

realize on or dispose of collateral, or

(iii) a waiver of the benefit of any law intended for the advantage or
protection of an obligor.

(b) "Instrument" means a negotiable instrument.

(c) An order that meets all of the requirements of subsection (a), except
paragraph (1), and otherwise falls within the definition of "check" in
subsection (f) is a negotiable instrument and a check.

(d) A promise or order other than a check is not an instrument if, at the
time it is issued or first comes into possession of a holder, it contains a
conspicuous statement, however expressed, to the effect that the promise
 or order is not negotiable or is not an instrument governed by this
Article.

Thus, for a writing to be a negotiable instrument under Article 3,[1] the following
requirements must be met:

1. The promise or order to pay must be unconditional;

2. The payment must be a specific sum of money, although interest may be added to
the sum;
3. The payment must be made on demand or at a definite time;
4. The instrument must not require the person promising payment to perform any act
other than paying the money specified;
5. The instrument must be payable to bearer or to order.

The latter requirement is referred to as the "words of negotiability": a writing which does
not contain the words "to the order of" (within the four corners of the instrument or in
endorsement on the note or in allonge) or indicate that it is payable to the individual
holding the contract document (analogous to the holder in due course) is not a negotiable
instrument and is not governed by Article 3, even if it appears to have all of the other
features of negotiability. The only exception is that if an instrument meets the definition
of a cheque (a bill of exchange payable on demand and drawn on a bank) and is not
payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable
instrument.

[edit] Negotiation and endorsement

Persons other than the original obligor and obligee can become parties to a negotiable
instrument. The most common manner in which this is done is by placing one's signature
on the instrument (“endorsement”): if the person who signs does so with the intention of
obtaining payment of the instrument or acquiring or transferring rights to the instrument,
the signature is called an endorsement. There are five types of endorsements
contemplated by the Code, covered in UCC Article 3, Sections 204–206:

• An endorsement which purports to transfer the instrument to a specified person is

a special endorsement;
• An endorsement by the payee or holder which does not contain any additional
notation (thus purporting to make the instrument payable to bearer) is an
endorsement in blank or blank endorsement;
• An endorsement which purports to require that the funds be applied in a certain
manner (e.g. "for deposit only", "for collection") is a restrictive endorsement; and,
• An endorsement purporting to disclaim retroactive liability is called a qualified
endorsement (through the inscription of the words "without recourse" as part of
the endorsement on the instrument or in allonge to the instrument).
 • An endorsement purporting to add terms and conditions is called a conditional
endorsement – for example, "Pay to the order of Amy, if she rakes my lawn next
• Thursday November 11th, 2007". The UCC states that these conditions may be
disregarded.[2]

If a note or draft is negotiated to a person who acquires the instrument

1. in good faith;
2. for value;
3. without notice of any defenses to payment,

the transferee is a holder in due course and can enforce the instrument without being
subject to defenses which the maker of the instrument would be able to assert against the
original payee, except for certain real defenses. These real defenses include (1) forgery of
the instrument; (2) fraud as to the nature of the instrument being signed; (3) alteration of
the instrument; (4) incapacity of the signer to contract; (5) infancy of the signer; (6)
duress; (7) discharge in bankruptcy; and, (8) the running of a statute of limitations as to
the validity of the instrument.

The holder-in-due-course rule is a rebuttable presumption that makes the free transfer of
negotiable instruments feasible in the modern economy. A person or entity purchasing an
instrument in the ordinary course of business can reasonably expect that it will be paid
when presented to, and not subject to dishonor by, the maker, without involving itself in a
dispute between the maker and the person to whom the instrument was first issued (this
can be contrasted to the lesser rights and obligations accruing to mere holders). Article 3
of the Uniform Commercial Code as enacted in a particular State's law contemplate real
defenses available to purported holders in due course.

The foregoing is the theory and application presuming compliance with the relevant law.
Practically, the obligor-payor on an instrument who feels he has been defrauded or
otherwise unfairly dealt with by the payee may nonetheless refuse to pay even a holder in
due course, requiring the latter to resort to litigation to recover on the instrument.

[edit] Usage

While bearer instruments are rarely created as such, a holder of commercial paper with
the holder designated as payee can change the instrument to a bearer instrument by an
endorsement. The proper holder simply signs the back of the instrument and the
instrument becomes bearer paper, although in recent years, third party checks are not
being honored by most banks unless the original payee has signed a notarized document
stating such.

Alternately, an individual or company may write a check payable to "Cash" or "Bearer"

and create a bearer instrument. Great care should be taken with the security of the
instrument, as it is legally almost as good as cash.
12

Export Working Capital Financing

Exporters who lack sufficient funds to extend open accounts in the global market needs
export working capital financing that covers the entire cash cycle, the from purchase of
raw materials through the ultimate collection of the sales proceeds. Export working
capital
facilities, which are generally secured by personal guarantees, assets, or receivables, can
be structured to support export sales in the form of a loan or a revolving line of credit.

Government-Guaranteed Export Working Capital Programs

The U.S. Small Business Administration and the Export–Import Bank of the United
States
offer programs that guarantee export working capital facilities granted by participating
lenders to U.S. exporters. With those programs, U.S. exporters can obtain needed
facilities
from commercial lenders when financing is otherwise not available or when borrowing
capacity needs to be increased.

Export Credit Insurance

Export credit insurance provides protection against commercial losses (such as default,
insolvency, and bankruptcy) and political losses (such as war, nationalization, and
currency
inconvertibility). It allows exporters to increase sales by offering liberal open account
terms to new and existing customers. Insurance also provides security for banks that are
providing working capital and are financing exports.

Export Factoring

Factoring in international trade is the discounting of short-term receivables (up to 180

days).
The exporter transfers title to short-term foreign accounts receivable to a factoring house,
or a factor, for cash at a discount from the face value. It allows an exporter to ship on
open
account as the factor assumes the financial ability of the importer to pay and handles
collections
on the receivables. The factoring house usually works with exports of consumer goods.

Trade Finance Technique Unavailable for Open Account Terms:

Forfaiting

Forfaiting is a method of trade financing that allows the exporter to sell medium-term
receivables (180 days to 7 years) to the forfaiter at a discount, in exchange for cash. The
forfaiter assumes all the risks, thereby enabling the exporter to offer extended credit
terms
and to incorporate the discount into the selling price. Forfaiters usually work with exports
of capital goods, commodities, and large projects. Forfaiting was developed in
Switzerland
in the 1950s to fill the gap between the exporter of capital goods, who would not or could
not deal on open account, and the importer, who desired to defer payment until the capital
equipment could begin to pay for itself. More detailed information about forfaiting is
provided
in Chapter 10 of this guide.

Letter of credit
From Wikipedia, the free encyclopedia
Jump to: navigation, search

After a contract is concluded between buyer and seller, buyer's bank supplies a
letter of credit to seller.

Seller consigns the goods to a carrier in exchange for a bill of lading.

Seller p bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of
lading for payment from the buyer.

Buyer provides bill of lading to carrier and takes delivery of goods.

A standard, commercial letter of credit (LC[1]) is a document issued mostly by a

financial institution, used primarily in trade finance, which usually provides an
irrevocable payment undertaking.

The letter of credit can also be source of payment for a transaction, meaning that
redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for deals between a supplier in one
country and a customer in another. In such cases the International Chamber of Commerce
Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the
latest version).[2] They are also used in the land development process to ensure that
approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The
parties to a letter of credit are usually a beneficiary who is to receive the money, the
issuing bank of whom the applicant is a client, and the advising bank of whom the
beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended
or canceled without prior agreement of the beneficiary, the issuing bank and the
confirming bank, if any. In executing a transaction, letters of credit incorporate functions
common to giros and Traveler's cheques. Typically, the documents a beneficiary has to
present in order to receive payment include a commercial invoice, bill of lading, and
documents proving the shipment was insured against loss or damage in transit.

Contents
[hide]

• 1 Terminology
o 1.1 Origin of the term
o 1.2 Types and related terms
• 2 Documents that can be presented for payment
• 3 Legal principles governing documentary credits
• 4 The price of letters of credit
• 5 Legal basis
• 6 International Trade Payment methods
• 7 Risk situations in letter-of-credit transactions
• 8 See also
• 9 References

• 10 External links

[edit] Terminology

[edit] Origin of the term

The English name “letter of credit” derives from the French word “accreditation”, a
power to do something, which in turn is derivative of the Latin word “accreditivus”,
meaning trust. This applies to any defense relating to the underlying contract of sale. This
is as long as the seller performs their duties to an extent that meets the requirements
contained in the letter of credit.[citation needed]

[edit] Types and related terms

Letters of credit (LC) deal in documents, not goods. The LC could be irrevocable or
revocable. An irrevocable LC cannot be changed unless both the buyer and seller agree.
Whereas in a revocable LC changes to the LC can be made without the consent of the
beneficiary. A sight LC means that payment is made immediately to the
beneficiary/seller/exporter upon presentation of the correct documents in the required
time frame. A time or date LC will specify when payment will be made at a future date
and upon presentation of the required documents.[citation needed]
Negotiation means the giving of value for draft(s) and/or document(s) by the bank
authorized to negotiate, viz the nominated bank. Mere examination of the documents and
forwarding the same to the letter of credit issuing bank for reimbursement, without giving
of value / agreed to give, does not constitute a negotiation.[clarification needed][citation needed]

[edit] Documents that can be presented for payment

To receive payment, an exporter or shipper must present the documents required by the
letter of credit. Typically instead of presenting goods themselves, a document proving the
goods were sent is presented instead. However, the list and form of documents is open to
imagination and negotiation and might contain requirements to present documents issued
by a neutral third party evidencing the quality of the goods shipped, or their place of
origin or place. Typical types of documents in such contracts might include:[citation needed]

• Financial Documents

Bill of Exchange, Co-accepted Draft

• Commercial Documents

Invoice, Packing list

• Shipping Documents

Transport Document, Insurance Certificate, Commercial, Official or Legal

Documents

• Official Documents

License, Embassy legalization, Origin Certificate, Inspection Certificate,

Phytosanitary certificate

• Transport Documents

Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck

receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt,
Deliver Challan...etc

• Insurance documents

Insurance policy, or Certificate but not a cover note.

[edit] Legal principles governing documentary credits

One of the primary peculiarities of the documentary credit is that the payment obligation
is abstract and independent from the underlying contract of sale or any other contract in
the transaction. Thus the bank’s obligation is defined by the terms of the credit alone, and
the sale contract is irrelevant. The defences of the buyer arising out of the sale contract do
not concern the bank and in no way affect its liability.[3] Article 4(a) UCP states this
principle clearly. Article 5 the UCP further states that banks deal with documents only,
they are not concerned with the goods (facts). Accordingly, if the documents tendered by
the beneficiary, or his or her agent, appear to be in order, then in general the bank is
obliged to pay without further qualifications.

The policies behind adopting the abstraction principle are purely commercial and reflect a
party’s expectations: firstly, if the responsibility for the validity of documents was thrown
onto banks, they would be burdened with investigating the underlying facts of each
transaction and would thus be less inclined to issue documentary credits as the
transaction would involve great risk and inconvenience. Secondly, documents required
under the credit could in certain circumstances be different from those required under the
sale transaction; banks would then be placed in a dilemma in deciding which terms to
follow if required to look behind the credit agreement. Thirdly, the fact that the basic
function of the credit is to provide the seller with the certainty of receiving payment, as
long as he performs his documentary duties, suggests that banks should honour their
obligation notwithstanding allegations of misfeasance by the buyer.[4] Finally, courts have
emphasised that buyers always have a remedy for an action upon the contract of sale, and
that it would be a calamity for the business world if, for every breach of contract between
the seller and buyer, a bank were required to investigate said breach.

The “principle of strict compliance” also aims to make the bank’s duty of effecting
payment against documents easy, efficient and quick. Hence, if the documents tendered
under the credit deviate from the language of the credit the bank is entitled to withhold
payment even if the deviation is purely terminological.[5] The general legal maxim de
minimis non curat lex has no place in the field of documentary credits.

[edit] The price of letters of credit

All the charges for issuance of Letter of Credit, negotiation of documents,

reimbursements and other charges like courier are to the account of applicant or as per
the terms and conditions of the Letter of credit. If the letter of credit is silent on charges,
then they are to the account of the Applicant. The description of charges and who would
be bearing them would be indicated in the field 71B in the Letter of Credit.[citation needed]

[edit] Legal basis

Although documentary credits are enforceable once communicated to the beneficiary, it

is difficult to show any consideration given by the beneficiary to the banker prior to the
tender of documents. In such transactions the undertaking by the beneficiary to deliver
the goods to the applicant is not sufficient consideration for the bank’s promise because
the contract of sale is made before the issuance of the credit, thus consideration in these
circumstances is past. In addition, the performance of an existing duty under a contract
cannot be a valid consideration for a new promise made by the bank: the delivery of the
goods is consideration for enforcing the underlying contract of sale and cannot be used,
as it were, a second time to establish the enforceability of the bank-beneficiary relation.
[citation needed]

Legal writers have failed to satisfactorily reconcile the bank’s undertaking with any
contractual analysis. The theories include: the implied promise, assignment theory, the
novation theory, reliance theory, agency theories, estoppels and trust theories,
anticipatory theory, and the guarantee theory.[6] Davis, Treitel, Goode, Finkelstein and
Ellinger have all accepted the view that documentary credits should be analyzed outside
the legal framework of contractual principles, which require the presence of
consideration. Accordingly, whether the documentary credit is referred to as a promise,
an undertaking, a chose in action, an engagement or a contract, it is acceptable in English
jurisprudence to treat it as contractual in nature, despite the fact that it possesses
distinctive features, which make it sui generis.

A few countries including the United States (see Article 5 of the Uniform Commercial
Code) have created statutes in relation to the operation of letters of credit. These statutes
are designed to work with the rules of practice including the UCP and the ISP98. These
rules of practice are incorporated into the transaction by agreement of the parties. The
latest version of the UCP is the UCP600 effective July 1, 2007.[7] The previous revision
was the UCP500 and became effective on 1 January 1994. Since the UCP are not laws,
parties have to include them into their arrangements as normal contractual provisions. For
more information on legal issues surrounding letters of credit, the Journal of International
Commercial Law at George Mason University's School of Law published Volume 1,
Issue 1 exclusively on the topic.

International Trade Payment methods

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help by converting this article to prose, if appropriate. Editing help is available.
(January 2011)

• Advance payment (most secure for seller)

Where the buyer parts with money first and waits for the seller to forward the goods

• Documentary Credit (more secure for seller as well as buyer)

Subject to ICC's UCP 600, where the bank gives an undertaking (on behalf of buyer and
at the request of applicant) to pay the shipper (beneficiary) the value of the goods shipped
if certain documents are submitted and if the stipulated terms and conditions are strictly
complied with.

Here the buyer can be confident that the goods he is expecting only will be received since
it will be evidenced in the form of certain documents called for meeting the specified
terms and conditions while the supplier can be confident that if he meets the stipulations
his payment for the shipment is guaranteed by bank, who is independent of the parties to
the contract.

• Documentary collection (more secure for buyer and to a certain extent to seller)

Also called "Cash Against Documents". Subject to ICC's URC 525, sight and usance, for
delivery of shipping documents against payment or acceptances of draft, where shipment
happens first, then the title documents are sent to the [collecting bank] buyer's bank by
seller's bank [remitting bank], for delivering documents against collection of
payment/acceptance

• Direct payment (most secure for buyer)

Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on
open account terms.

Risk situations in letter-of-credit transactions

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help by converting this article to prose, if appropriate. Editing help is available.
(January 2011)

Fraud Risks

• The payment will be obtained for nonexistent or worthless merchandise against

presentation by the beneficiary of forged or falsified documents.
• Credit itself may be forged.

Sovereign and Regulatory Risks

• Performance of the Documentary Credit may be prevented by government action

outside the control of the parties.

Legal Risks

• Possibility that performance of a Documentary Credit may be disturbed by legal

action relating directly to the parties and their rights and obligations under the
Documentary Credit

Force Majeure and Frustration of Contract

• Performance of a contract – including an obligation under a Documentary Credit

relationship – is prevented by external factors such as natural disasters or armed
conflicts

Risks to the Applicant

 • Non-delivery of Goods
• Short Shipment
• Inferior Quality
• Early /Late Shipment
• Damaged in transit
• Foreign exchange
• Failure of Bank viz Issuing bank / Collecting Bank

Risks to the Issuing Bank

• Insolvency of the Applicant

• Fraud Risk, Sovereign and Regulatory Risk and Legal Risks

Risks to the Reimbursing Bank

• no obligation to reimburse the Claiming Bank unless it has issued a

reimbursement undertaking.

Risks to the Beneficiary

• Failure to Comply with Credit Conditions

• Failure of, or Delays in Payment from, the Issuing Bank
• Credit Issued by Party other than Bank

Risks to the Advising Bank

• The Advising Bank’s only obligation – if it accepts the Issuing Bank’s

instructions – is to check the apparent authenticity of the Credit and advising it to
the Beneficiary

Risks to the Nominated Bank

• Nominated Bank has made a payment to the Beneficiary against documents that
comply with the terms and conditions of the Credit and is unable to obtain
reimbursement from the Issuing Bank

Risks to the Confirming Bank

• If Confirming Bank’s main risk is that, once having paid the Beneficiary, it may
not be able to obtain reimbursement from the Issuing Bank because of insolvency
of the Issuing Bank or refusal of the Issuing Bank to reimburse because of a
dispute as to whether or not payment should have been made under the Credit

Other Risks in International Trade

• A Credit risk risk from change in the credit of an opposing business.

• An Exchange risk is a risk from a change in the foreign exchange rate.
• A Force majeure risk is 1. a risk in trade incapability caused by a change in a
country's policy, and 2. a risk caused by a natural disaster.
• Other risks are mainly risks caused by a difference in law, language or culture. In
these cases, the cargo might be found late because of a dispute in import and
export dealings.

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